8 Credit Repair Mistakes That Will Cost You

Rebuilding a poor credit score can seem like an overwhelming task, especially as bad credit puts you in a rotten financial situation. With bad credit you get much higher interest rates, and can often get completely denied when you apply for a new account. But if you don't go about repairing your credit in the right way, you may actually be doing more harm than good. Here are the top eight credit repair mistakes too many people make every day.

1. Closing Accounts With a Zero Balance

We all hear horror stories of accounts being used by identity thieves long after we stopped using them. But with today's identity theft protections, and credit card companies footing the bill for fraud, that's no longer a concern. However, these cards on your file, although not being used, do count toward your credit score.

Let's say you have three credit cards, each with a $12,000 limit. One card is at a zero balance, one has $1,500 on it, and the other has $5,500. You decide to transfer the balance of $1,500 to the card with $5,500 and close the two empty accounts. Huge mistake. Before, you had $36,000 in available credit, and were using on $7,000 of it. That's just over 19% of your credit utilization. Now, you have only $12,000 in available credit, and are utilizing 58% off your available credit. You have the same amount of debt, but your credit score just took a hit because of your huge debt to credit availability ratio.

Instead of closing old accounts, use them for smaller purchases each month, and pay off the balances in full. It will keep your credit score in check.

2. Hiring a Credit Repair Company

You've seen the ads. You've heard the testimonials. They offer to clean up your credit (for a monthly fee, of course), and say they will raise your score by hundreds of points. Well, if you believe that, someone has a bridge to sell you, too.

Most of these credit repair businesses are in the business of making as much money from you as possible, and will stretch out the process for months, or even years. One such technique they use to do this is called "jamming," and it can seriously damage your reputation. The problem is, "jamming" actually does work…for a short while.

Here's how it works: When you (or your credit repair agency) sends a dispute to a credit bureau, it will be forwarded to a vendor for verification. And under the rules of the Fair Credit Reporting Act, the agency has to review and respond to every dispute within 30 days. The "jamming" scam perverts this system by inundating the bureaus with challenges of every item on your credit report. It's an overflow of paperwork, and the items don't get addressed in time, so they disappear from your credit report. But, they come back. The vendor who reported it will keep doing so, and until it is properly addressed, it will never disappear. But the credit repair agency looks like it is doing the job, and you keep on paying them to scrub items that keep coming back.

3. Lying About Your Credit Issues

This is not the time to start getting creative with your explanations, or just plain lying about what is in your credit report. If you have a legitimate issue with something that is in your report, such as a late payment you know you made on time, then by all means fight tooth-and-nail to dispute it. But if you did make the payment late — sorry, you did that. It's on you, regardless of the situation. You can ask, or even plead, for the vendor who reported it to scrub it from their records, but lying won't get you very far. You could even get into some legal trouble, which is not going to do you any favors at all.

4. Paying Collection Fees

Collection agencies are built on a model of intimidation, scare tactics, bullying, and fear. If you do get a call from a collection agency, it will not be pleasant. You may be told you owe $50, the remaining balance on a "charged-off" (also known as delinquent) account. Hey, it's only $50, you have it available now, so you pay it off. Wrong. Dead wrong.

Although it will get the collection agency off your back, it won't do anything to fix your credit score. In fact, it's an admission of guilt, and can impact your account by more negative points than simply not paying it off at all. As far as a credit report is concerned, paying a $50 fee on a charged-off account has the same impact as paying off a $50,000 fee. Your credit will suffer, because you have a permanent record that you are unreliable. Do whatever you can to work this debt out without paying the collection fee.

5. Consolidating Too Much Debt

When it comes to financial issues and credit scores, variety is definitely the spice of life. Lenders in general like to see a selection of different credit cards, loans, and other accounts, with small, manageable balances that are paid each month. You may very well have a hard time keeping track of all these smaller payments, and decide to put them all onto one card to save time and money. That is a mistake.

If you close those accounts, your credit score is affected, as outlined earlier. If you leave them all open, but have eight cards at zero and one that is almost maxed out, that is also going to hurt your credit score. Lenders love revolving balances, but other lenders may look at you as a risk if you have eaten up 90% of your available credit on just one card. You need to spread it around. Plus, without strict discipline, you could find yourself using the other cards again, and bury yourself under more monthly debts.

6. Eliminating Every Single Debt

After getting burned with credit cards and loans, the first thing you want to do is swear them off completely. But wait. A credit score is affected by many things, but one major contributing factor is how you pay your debts each month. If you have small debts and pay on time, you are low risk, and highly attractive. You'll have a credit history. If you have nothing in your credit report, lenders will give you a very wide berth. They don't have a resume of your spending habits to go from, and that is like letting someone rent your house without doing a background check. So once you've done the smart thing and paid off all your debt, pick one or two credit cards with solid rewards, use it to pay for stuff you meant to buy, and pay it off entirely when the bill is due. That will keep your credit active, healthy, and you'll get a few bucks back from your cash rewards credit cards, too. (See also: Use These Credit Cards When You Grocery Shop)

7. Not Keeping Accurate Documentation

In this day and age, there is no excuse for not maintaining records of your correspondence with collection agencies, credit card companies, and other lenders. If you don't already have one, buy yourself a basic scanner and keep a copy of every letter you send (in this case, physical letters are much better than emails), or even take photographs. Send any letters, such as credit disputes, via certified mail, and indicate that you want a return receipt. Keep a file on your computer as a back up, and a physical folder that you can access at any time. You want to be completely buttoned up, and ready to bring out evidence of your payments and conversations at a moment's notice.

8. Finally… Doing Nothing

Yes, having bad credit sucks. But choosing to ignore it, hoping it will sort itself out over time, is even worse. You do not have to accept a bad credit score. You do not have to spend a lifetime paying for small mistakes you made. You can fix it, and you can do it by yourself, or find a legitimate professional to help you out.

First and foremost, you should be checking your credit report often. Credit Karma is a great place to start, and it's totally free. Also check out AnnualCreditRepot.com, which is also free, and covers the three big reporting bureaus — TransUnion, Equifax, and Experian. When you see a mistake, no matter how small, get in contact with the lender and fix it. You have the power, but you have to act upon it.

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Guest's picture
Jonathan Dyer

Good info. Our credit system can be pretty wonky at times, allowing people to make easy mistakes that seem like the right thing to do.

Guest's picture

Sorry but I disagree with all of this.
I have no debt and quit the credit score game over 10 years ago.
I own my condo flat out no mortgage and I pay cash/ATM card for everything, I do not finance anything.

To me having credit is just your way of showing people exactly how desperate and gullible you actually are.